Wednesday 26 March 2008 22.40 EDT
First published on Wednesday 26 March 2008 22.40 EDT

The Financial Services Authority sought to close the door on the Northern Rock affair after it put forward plans to overhaul its staffing and systems to prevent another run on a British bank.

The main City watchdog said its failure to monitor properly the Newcastle-based mortgage lender was "totally unacceptable" and must not be repeated as it laid out a seven-point restructuring plan. It said that while its revamp would bring all banks under closer scrutiny it could not eliminate the risk of other finance companies going bust. Under the new regime supervisors will spend more time monitoring financial institutions that pose a risk to the financial system. The regulator will also need to recruit more staff to cope with the increased workload.

Hector Sants, FSA chief executive, said he wanted to make sure "proper standards" applied to all significant firms supervised by the regulator. "That does not mean a 'no failure' regime. However, together with the proposed reform of the insolvency regime for banks and an improved deposit protection scheme, it creates a platform to ... better protect the interests of consumers."

The FSA has come under strong criticism for its supervision of Northern Rock despite repeated warnings about the impending credit crunch.

Its decision to admit to basic failures was welcomed by the British Bankers' Association and the government. However, the report failed to deflect critics, who said the internal review revealed deep flaws in Britain's system of financial regulation. David Cameron, the Tory leader, said the FSA's report on Northern Rock was damning. He told Gordon Brown, the prime minister, in the Commons: "You said the FSA had done a good job. What you haven't read is the report by the FSA that says it is short of expertise in some fundamental areas, notably prudential banking experience and financial data analysis.

"Aren't those the absolutely key things you need to be a regulator? Isn't that why the Bank of England should be in charge of rescues, rather than the FSA?"

Brown responded: "Every financial organisation around the world that is regulating markets is accepting the need to do more ... The real problem is off-balance sheet activities, write-offs that have not been properly declared, credit-rating agencies that have done the job of being advisers as well as raters."

Internal auditors at the FSA found that supervisors were distracted and under-resourced during a busy time for the regulator. A "fewer but better" staffing policy resulted in steep cuts in numbers in the years before the Northern Rock collapse.

The lender was also categorised as low-risk with the result that supervisors spent little time monitoring its activities. There were 15 meetings over two years with the lender compared with 143 at another high-street bank. The Northern Rock meetings mainly took place on one day and most were not minuted.

Sants said the standard of supervision was "not acceptable", though "whether that would have affected the outcome in this case is impossible to judge".

Vince Cable, Liberal Democrat Treasury spokesman, declared that Sants' statement was "a total cop-out". He said: "It is critical that the FSA sets itself higher standards. Not only should it be alert to known dangers, but it should also investigate the impact and risk of new business practices ... Simply asking for more staff is not the answer; we need intelligent regulators not legions of box-tickers - quality, not quantity."

Trade unions said they were disappointed that the review was limited to the conduct of the FSA and not a broader investigation of the lender, its directors and the handling by the tripartite authorities of the run on the bank. Graham Goddard, Unite spokesman, said: "The failures ... mean that some 2,000 jobs will be lost at the bank."